Record inflation has forced many Americans to cut back on their retirement savings. Workers of all age groups, from their twenties to their sixties and beyond, worry about their ability to save enough for retirement.
Student loan debt is only exacerbating this crisis. Fortunately, Congress is considering a measure that would offer some relief to many of the country’s 42.8 million federal student loan borrowers.
The SECURE 2.0 Act would reflect, among other things, a pioneering program Abbott launched in 2018 in which employers “match” a percentage of the payments employees make toward their student loans with contributions to their retirement accounts.
It’s a great way to simultaneously address the challenges of student debt and the nation’s retirement savings, and it deserves to be at the top of Congress’s year-end agenda to help reduce student debt and increase savings. for retirement.
According to the Federal Reserve, total student debt has ballooned to $1.8 trillion. That averages out to nearly $38,000 per borrower. Borrowers can expect to spend between 10 and 30 years paying off these debts.
Student debt also spans generations. About 36% of Gen Z seniors have student loan debt, and nearly a third of millennials do. Even Baby Boomers collectively owe billions of dollars for education they may have completed decades ago.
This debt is bad enough for the financial situation of the borrowers. By further preventing them from saving even modest amounts for retirement, we deprive them of “free money” from their employers when they could use it most.
Most employers that offer a 401(k) or other retirement plan “match” a portion of the contributions employees make to their accounts. A common approach is to match 50% of an employee’s contribution to her 401(k), up to 6% of her salary. Under that system, an employee who makes $60,000 and contributes 6%, or $3,600 a year, would receive an additional $1,800 from his employer in his retirement account.
An extra $5,400 in retirement savings may not sound like a princely fortune, but it can add up, thanks to the miracle of compound interest. After 30 years of such contributions, and assuming a 5% return on investment, an individual would have more than $382,000, approximately $215,000 more than they actually contributed.
Unfortunately, many employees leave that free money on the table. A fifth of workers do not take advantage of their employers’ matching program. Student loan obligations can be a big reason.
This issue inspired us at Abbott to launch our “Freedom 2 Save program” in 2018, but we had to seek permission from the IRS to set it up. SECURE 2.0 would make programs like ours legal to other employers without requiring a special waiver.
If companies start implementing these programs, workers will no longer have to make the difficult choice between paying off student debt and saving for retirement.
By allowing employers to seed their employees’ retirement accounts when they pay off their student loans, Congress could boost the finances of countless Americans today and for the long term. The House passed the SECURE 2.0 Act by an overwhelming bipartisan margin earlier this year. Now it is up to the Senate to do the same.
Mary Moreland is the executive vice president of human resources for abbot.
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